Why does Implied Risk Aversion Smile?

A few recent papers have derived estimates of the representative agent's risk aversion by comparing the statistical density of asset returns and the state-price density. The implied risk aversion estimates obtained in these studies are puzzling, exhibiting (i) pronounced U-shaped patterns (a "smile") and (ii) negative values. This paper analyzes three potential explanations for these phenomena: (i) heterogeneity in investor preferences, (ii) difficulties in estimating agents' beliefs and (iii) heterogeneous beliefs among agents. Our results show that preferences alone cannot explain the patterns reported in the literature. Misestimation of investors' beliefs caused by nonstationarity of the return process cannot explain the smile either. The patterns of beliefs misestimation required to generate the empirical implied risk aversion estimates found in the literature suggest that heterogeneous beliefs are the most likely cause of the smile.asset pricing; state-price density; heterogeneous preferences; heterogeneous beliefs; implied risk aversion

The Dominance of Retail Stores

Most items are sold to consumers by retail stores. Stores have two features that distinguish them from auctions. First, the price is posted and a consumer who values the good at more than the posted price is sold the good. Second, the sale takes place as soon as the consumer decides to buy. In contrast, auctions have prices that are determined ex post and the potential consumer must wait until the auction is held to buy the good. Consequently, auctions result in false trading', where buyers sometimes pass up other valuable opportunities while waiting for the auction to occur or instead make undesired duplicate purchases. Retail stores dominate auctions when the good is perishable and/or becomes obsolete quickly, when the market is thin, and when close substitutes for the good are plentiful. These predictions are consistent with a number of observed phenomena.

Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling

When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition is ultimately borne by the seller. A seller can achieve the desired prevention of information acquisition through posted-price selling, by offering prospective buyers a discount that is such as to deter them from gathering information. No such prevention is possible in the case of an auction. Clearly, a discount is costly to the seller. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high, and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter.Government Bonds; Corporate Bonds; Auctions; Posted-Price Selling; Costly Information

Negotiating over Banking Secrecy: The Case of Switzerland and the European Union

Over the period 2002 to 2003,Switzerland and the European Union (EU) were engaged in negotiations regarding banking secrecy. The EU's stated goal was for Switzerland to abolish banking secrecy. Switzerland refused and offered to impose a withholding tax on interest income instead. The two parties eventually agreed on the latter solution. We examine the effect of these negotiations on the share prices of four Swiss banks: UBS, Credit Suisse Group (CSG), Julius Baer (Baer), and Vontobel. Overall, investors believe that bank profitability will not be impacted by the imposition of the withholding tax. The event-by-event response of the share prices differs across banks. Whereas the two universal banks (UBS and CSG) primarily react to the threat of sanctions on their EU-based operations, the private banks (Baer and Vontobel) react strongly to events suggesting that banking secrecy might be abolished.Banking Secrecy; Switzerland; Event Study

Liquidation Risk

During the turmoil in financial markets in late 1998, financial institutions attempting to liquidate positions to meet capital requirements may have faced unexpectedly high bid-ask spreads. In this paper, we investigate the effect on key risk measures (such as the likelihood of insolvency, value at risk, and expected tail loss) of spreads that are likely to widen just when positions must be liquidated in order to maintain capital ratios. Our results show that illiquidity causes significant increases in risk measures, especially with fat-tailed returns. A potential strategy to address this problem is for financial institutions to sell illiquid assets first, keeping a "cushion" of cash and liquid assets for "rainy days". According to a simple model presented in this paper, such a strategy, while increasing expected transaction costs, may significantly decrease tail losses and, especially, the probability of insolvency. In light of our results, it seems wise for financial institutions to carefully examine their strategies for liquidation during periods of severe stress.

Paths to Convergence: Stock Price Behavior After Donald Trump's Election

How do market prices adjust towards stability after a shock? Tracking individual stock prices following their dramatic shakeup after Donald Trump’s surprise election provides an answer. Prices moved overwhelmingly in the appropriate direction on the first post-election day, albeit much too little. Relative prices needed several daily iterations to converge. Three days of historically strong cross-sectional momentum were followed by a brief reversal. Prices then settled. Firm characteristics that explained first-day returns, such as corporate taxes and foreign revenues, accounted for most of the observed momentum. These findings support prominent theories of slow but predictable diffusion of information into prices

Befristete Beschäftigung in der Schweiz : Ausmaß, Determinanten und ökonomische Bewertung im internationalen Vergleich (Temporary employment in Switzerland * extent, determinants an evaluation in an international perspective)

"This study analyses the extent and determinants of temporary employment in Switzerland and performs an evaluation of these contracts using data from the first three waves of the Swiss Household Panel (SHP), i.e. for the years 1999 to 2001. It is shown that temporary employment is most common among highly skilled as well as young and older workers. Although the wages of females in temporary employment are lower than those of other female workers, our results show that this wage differential cannot be attributed to the type of contract (i.e. whether temporary or not), but instead to unobservable individual heterogeneity. However, there is no significant wage effect in the male sample. Both the actual and perceived unemployment risk of temporary workers is higher than that of workers holding permanent contracts. Mobility between temporary and permanent jobs is quite high. Nevertheless, a certain persistency within temporary jobs can be observed. With regard to job satisfaction, temporary workers are more likely to report a higher level of general job satisfaction than workers with permanent contracts. However, males working an a temporary basis are often less satisfied with their wages than other workers. No significant differences between contract types can be detected in the probability of participating in job-related training. An international comparison based an data from the 1997 International Social Survey Programme (ISSP) reveals that the determinants of temporary employment in Switzerland are similar to those in other countries. It is also noted that, in a cross-national context, the level of unemployment has an effect on the extent of temporary employment within a country. Interestingly, employment protection legislation has no significant impact." (Author's abstract, IAB-Doku) ((en))befristeter Arbeitsvertrag - Determinanten, befristeter Arbeitsvertrag - internationaler Vergleich, Lebensalter, Qualifikation, Lohnhöhe, geschlechtsspezifische Faktoren, Arbeitsmarktrisiko, berufliche Mobilität, Arbeitszufriedenheit, betriebliche Weiterbildung, Arbeitsbedingungen, Randbelegschaft, Unternehmensgröße, Kündigungsschutz, Arbeitslosenquote, Schweiz, OECD

Extension of the composite CBS-QB3 method to singlet diradical calculations

The composite CBS-QB3 method is widely used to obtain accurate energies of molecules and radicals although its use in the case of singlet diradicals gives rise to some difficulties. The problem is related to the parameterized correction this method introduces to account for spin-contamination. We report a new term specifically designed to describe singlet diradicals separated by at least one CH2 unit. As a test case, we have computed the formation enthalpy of a series of diradicals that includes hydrocarbons as well as systems involving heteroatoms (nitrogen, oxygen). The resulting CBS-QB3 energies are very close to experiment